Cheaper prices ends Kroger’s 13-year food sales growth streak

Cheaper food is a boon for American shoppers. Their grocers? Not so much.

One of the largest US grocery chains, Kroger, is feeling the pinch from falling food prices, and its shares were down more than 3 per cent on Thursday after it reported its first drop in quarterly same-store sales in 13 years – though its executives are hoping the trend will reverse in the back half of 2017.

Kroger’s results showed identical-store sales excluding fuel — a closely watched industry metric — fell 0.7 per cent during the three-month period ending January 28, compared to 3.7 per cent growth a year earlier and breaking the company’s a 52-quarter growth streak.

J. Michael Scholtman, Kroger’s chief financial officer, said in a conference call with investors that on the identical-sales front, “deflation was the primary driver of our negative results for the quarter.”

According to consumer price-index summary from the US Labour Department, the index for food at home fell almost 2 per cent last year, driven primarily by declining produce prices, with the fruit-and-vegetable index decreasing nearly 5 per cent over the 12 months to January.

But there are signs that prices for some items are beginning to pick back up again, with the food index gaining 0.1 per cent in January — its first overall rise since April 2016. The food-at-home index was flat in January after a string of recent declines, and the indices for dairy and for meat, poultry fish and eggs all picked up in the first month of 2017.

Kroger executives said that while they expected 2016 trends to persist through the first half of the year, they were optimistic that it would eventually reverse. “We do think that will return to a slightly inflationary environment in the back half of the year,” Mr Scholtman said during the call. For 2017, Kroger is predicting identical-store sales excluding fuel to remain flat or grow as much as 1 per cent, in line with the full-year 1 per cent identical-store sales growth it posted for 2016.

Adding to pricing pressure has been growing competition in the food-shopping sector, with big-box retailers like Wal-Mart — which has also recently pointed to pressures from food deflation — aiming to gobble up market share from competitors.

Analysts have also been urging Target, which this week unveiled an overhaul of its pricing strategy to ramp up its efforts on the grocery fronts.

Kroger executives said during the investor call that they expect the next five years to be a fierce fight for dominance. In order to entice customers, Kroger became “more promotional and more aggressive on some pricing” during the past quarter, according to chief executive Rodney McMullen.

Other than the disappointing sales growth, Kroger’s results for the fourth quarter were largely better than Wall Street expected, with earnings per share coming in at 53 cents compared to estimates of 51.3 cents, on net income of $506m, versus the $490.7m expected. Revenue clocked in at $27.6bn, squeaking past the $27.3bn predicted.